Explainer Series: How RBF Layers into Your Capital Stack​

Revenue-based financing has become much more commonplace in recent years with the introduction of several billion dollars of new RBF capacity aimed at early stage companies. These agreements now routinely sit comfortably adjacent to other forms of capital without negatively impacting a company’s ability to secure future capital.

When we created RevUp in 2016, it was after many years of experience as early stage equity investors. With RevUp, we wanted an “exit-agnostic” model suitable for a broad spectrum of B2B and B2C companies that would generate returns from a variety of outcomes. In the years since, we have worked with a diverse portfolio of companies as they forged myriad paths to success, paths that frequently required an injection of capital both before and after a RevUp investment.

Having invested in 100+ companies, we know how important a dynamic capital strategy is to company success, whether the end goal is an exit, acquisition, a significant capital event, or sustained and profitable growth across time. With this experience in mind, we designed the non-equity RevUp deal to be compatible with a variety of other capital tools. Here is a summary of how RevUp fits with other capital, both before and after a RevUp investment.

Pre-RevUp Investment
RevUp typically invests into companies that are generating $500K-$3M in annual revenue. As a result, we are rarely the first or only capital into a business.

For example:

• ~70% of new RevUp investments have raised at least one round of equity before we invest. Given our non-equity model, we do not impact the “cap table” and are non-dilutive to current investors. Many of our investees come to us through referral from other early stage investors.
• RevUp deals use a revenue-royalty contract wherein companies return a small percentage of revenue over time. The percentage of revenue, and what it applies to, is dependent on a company’s current revenue, margins, CoGS, and future projections.
• For companies that see themselves as venture-scale, we often fit after an initial equity round but before Series A. Our focus is on increasing traction through the amplification and strategic expansion of a company’s marketing and sales capability.
• While some companies enter our portfolio as truly bootstrapped--having accepted no outside capital prior to RevUp—most have leveraged other forms of capital to fuel early growth (grants, government contracts, awards, customer-funded R&D, crowdfunding, etc.).
• Many of our physical product / e-commerce companies come to us with some debt/credit tools at play. Assuming the obligation is well managed, we will take a subordinated position to these funders if required. The RevUp deal has no debt component and does not require securitization.
• Existing and projected revenue is one the most important capital assets that we evaluate pre-investment. We only invest when a company’s margins and unit economics can comfortably support a revenue return over time. Because we do not use a debt instrument and take no personal guarantees, an uncomfortable fit on the return side is as likely to create a poor outcome for us as it is for the company.

Post-RevUp Investment
Virtually all companies in the RevUp portfolio take on additional capital, either in conjunction with or after RevUp investment. Being a part of a broader capital strategy is part and parcel of working with growing companies. Improving optionality and access to capital, is an important part of how we support our companies through time and as they grow.

Follow-on Equity
Revenue-based funding has the unique advantage of being non-dilutive to current and future equity investors. For RevUp companies pursuing equity rounds, the net effect of the RevUp investment further derisks the company for future equity investors. By helping our companies achieve the growth metrics needed to successfully raise from quality investors at favorable terms and a higher valuation, we support the equity journey without dilution. Additionally, we do not require a board seat, nor must a company seek our consent before accepting an equity investment.

Companies that have raised following a RevUp investment have:

• Raised significant equity from both institutional and individual investors on convertible notes and in priced rounds.
• Taken on equity investment with no change to the RevUp agreement.
• Elected to buy out the remainder of their RevUp agreement prior to / in tandem with the closure of a large round.

Companies in the RevUp portfolio have also leveraged non-equity capital to fuel growth, including debt, later stage revenue-based investment, government contracts, and strategic investment from industry partners.

RevUp partners Melissa Withers and Allan Tear bring 10+ years of experience to this process, both as equity investors in 100+ companies and as fund managers who have raised $60M+ in follow-on funding across multiple portfolios. Given this experience, we maintain close relationships with the equity investment community and routinely assist our portfolio in preparing for and navigating an equity fundraise.

Supporting the ongoing capitalization of RevUp portfolio companies is not a philanthropic pursuit: securing the right capital, at the right time, is a prerequisite for achieving the growth our companies project—projections which drive our own expectations for return on investment.

For more information about RevUp and how we invest, visit revupfund.com or contact us at info@revupfund.com.